Neither Hero Nor Devil. Just a Purpose-Driven Fed Chair.
The Federal Reserve gets accused of many things. The Chairman of The Federal Reserve, Ben Bernanke gets accused of many things. Is he E-vil? Nope. Is he a Great American? Probably not. So just what is Bernanke doing? My theory of Ben Bernanke’s mysterious objectives goes as follows.
Ben Bernanke is presiding over what he hopes will be the successful retirement of the largest demographic cohort in contemporary America. The Post WWII Baby Boom is far larger than the generation ahead of it (The Silent Generation) or behind it (Generation X). Boomer columnist and political observer Peggy Noonan once described the Baby Boom Generation as “America’s basketball in the python.” This is not their fault, per se, but it does make them pose a challenge to the rest of us as they drift towards the bottom of the actuarial charts. The current $85Bn per month of QE is the periodic glass of Metamucil-Juice prescribed by Dr. Bernanke to help the python pass the basketball.
The aging of this generation implies some very serious economic challenges that I think occupy the forefront of our current Fed Chairman’s mind. Once I’ve planted this axiom that Bernanke sees the retirement of America’s largest generation as America’s foremost economic risk, it becomes more explicable why the Fed does the strange and aggravating things that it does.
Ben Bernanke protects the stock market to protect the mutual funds that many workers have their 401-Ks invested in. Absent this protection and a lot of the older cohort in the work force may not be able to afford a very happy retirement. It’s not unfair to ask just who in the heck ever guaranteed you, I or even The Man on the Moon a worry-free retirement? But as we raise this objection, ask yourself how easily you’ll advance up the ladder if the people on the top rungs never complete their climb.
Ben Bernanke flattens bond yields to keep mortgages cheap enough to prop up real estate values. People that staked a lot of their retirement on selling their trophy home off and trading down can therefore still do so. This second prong of Bernanke’s trident comes with greater controversy. Unless you lived in Rip Van Winkle Land between 2006 and 2009, you have got to be asking “Just how did artificially inflated real estate prices work out for us five years ago?” Mr. Logic has a point here. The recent US history of real estate prop-jobs doesn’t inspire the confidence of the wise.
Chairman Bernanke does not operate in the reality-vacant feedback chamber that his detractors often believe he lives within. He spent the summer contemplating a taper of the current $85Bn by maybe $10Bn to $20Bn. That way the asset bubbles this policy deliberately inflated would have a reduced risk of popping due to over-pressure. This sentiment seemed to rule the day until the interest rates on 10-Year UST Bonds hit 2.8%. This led Bernanke not to taper and brought his critics out in legion as risk-averse currency traders bid farewell to Uncle Sam’s Greenback.
Perhaps the best way to sum up what happened is to look at what Fed Chairman Bernanke actually said when he announced a non-zero probability of a taper in the first place.
…If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear..
The taper was always a conditional policy. Whether it happened now or could happen later depends on how so doing matches with Ben Bernanke’s measures of economic risk. The biggest risks the current Fed Chairman sees are that the current group of workers aged 55-65 will not be able to retire in an orderly manner. Until he thinks this can happen absent QE, this policy will be the absorbing state of a Markov Chain. Unless we gain total energy independence or invent another Internet soon, this is pretty much what Fed Policy will revert back to for the rest of Ben Bernanke’s Fed Chairmanship. Expecting anything else misses the point of Ben Bernanke’s purpose-driven Fed.